Fed's Powell, in apparent dovish shift, says rates near neutral

With share prices falling Fed leaders have emphasized the need to move cautiously on interest rates More

Lloyd Bates
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03 December, 2018, 04:32

If you were surprised by Federal Reserve Chairman Jerome Powell's speech on Wednesday at which he hinted that rates were close to "neutral", you probably missed an earlier speech that offered a peek at the cards.

A few officials expressed concern about rates moving too high too quickly.

The remarks seemed more dovish than his comments in early October that the US central bank had a long way to go before interest rates hit neutral, indicating that more hikes could be on the horizon. Stocks swooned on those remarks as investors bet the USA central bank would need more rate hikes to prevent the economy from overheating.

By saying rates were slightly lower than the level he perceives as "neutral", the Fedchief's statement appears to be suggesting at least one more interest rate increase is coming in the near future.

In a speech Tuesday, Vice Chairman Richard Clarida suggested that the Fed would continue to strive to be "data dependent" by using the latest readings on the economy "with a healthy dose of judgment and humility" to determine its interest-rate policy.

While markets still expect a rate hike in December, Mr Powell said, "there is no preset policy path".

There wasn't much of a reaction in the financial markets on Thursday to the minutes from the Fed's early November meeting. "There is a great deal to like about this outlook, " he said in a speech to the Economic Club of NY.

Powell has been gradually raising rates since he was confirmed to his position by Trump in January.

Claiming that benchmark lending rates were "just below" a range of estimates for "neutral", that is, neither stimulating nor slowing growth, Powell sent a signal that markets took to mean the Fed might ease off on raising rates in 2019.

Factually, Powell's remarks on Wednesday and in October are both true. On Wednesday he referenced a range, and in October he likely referenced a median.

Stocks were higher across the board with the Dow rising more than 600 points while the S&P 500, Nasdaq, and Russell 2000 all gained more than 2.3%.

But markets, especially after the recent selloff, were focused less on such subtleties than on what Powell may have telegraphed about the future path of rate hikes.

Trump has been more outspoken than his predecessors in criticizing the Fed.

It was a "rookie mistake, " Omair Sharif, senior US economist at Societe Generale, said Wednesday in a note to clients.

The minutes said that such a change would help to convey "the Committee's flexible approach in responding to changing economic circumstances", while market supposed that this could indicate possible changes for the Fed's rate hike decisions in 2019. Still, "this dovish Fed lean is a fantastic cure-all for what ails stock markets sentiment".

U.S. Federal Reserve (Fed) said on Thursday that nearly all Fed policymakers expected another interest rate hike "likely to be warranted fairly soon". Powell and other Fed officials have since sounded a bit more cautious, nodding to a slowdown in Europe, Japan and China. Notes with short-term maturities fell as the 2-year yield went down to 2.813 and the 5-year fell to 2.877.

Federal Reserve Chairman Jerome Powell says he's pleased with the state of the US economy but cautions that some forms of corporate debt have reached risky levels. That would bring it about to the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 percent to 3.5 percent. "We will be paying very close attention to what incoming economic and financial data are telling us".

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